Namibia's central bank cuts rate 1st time in 2 years as economy slows

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Written by Central Bank News

Published: August 15, 2019 1:07 PM

Namibia's central bank lowered its benchmark repo rate by 25 basis points to 6.50 percent, saying economic growth, inflation and growth in credit to individuals slowed during the first six months and "key risks to the global outlook remain, amongst others, escalating trade and geopolitical tensions and higher policy uncertainty across many countries, including Brexit."

It is Bank of Namibia's (BON) first rate cut since August 2017 and brings the rate back to its level in January 2016 before the central bank embarked on a tightening cycle that lasted 17 months.

The bank's monetary policy committee said the decision to cut the rate was "to support domestic economic activity and to maintain the one-to-one link between the Namibia Dollar and the South African Rand."

Since BON's previous policy meeting in June, the South African Reserve Bank (SARB) on July 18 lowered its policy rate by 25 basis points, its first cut since March 2018 and one of 31 central banks that lowered their rates in the third quarter of this year in response to slowing global growth.

As of July 31, Namibia's stock of international reserves rose to N$35.2 billion from N$34.1 billion in June, enough to cover 4.8 months of imports, and a level BON said was sufficient to protect the peg of the Namibia Dollar to the Rand and to meet its international financial obligations.

The Namibian dollar trades at a rate of 1:1 to the rand, which has fallen against the U.S. dollar since SARB's rate cut. This has pulled down the Namibian dollar, which fell 1.4 percent today after the rate cut to 15.34 to the U.S. dollar to be down 5.9 percent this year.

In April BON lowered its forecast for economic growth this year to 0.3 percent from December's forecast of 1.5 percent and said today the domestic economy was projected to remain weak in 2019.

Last year Namibia's economy shrank for the second consecutive year and in June the International Monetary Fund said it expected growth to "remain mildly negative in 2019, as a poor rain season and reduced diamond production continued to weigh on a tentative recovery."

The central bank said the slowdown in the first six months of this year was reflected in the mining, construction, electricity, and wholesale and retail trade, while the sectors of manufacturing, transport and communication improved as compared to the same 2018 period.

Namibia's gross domestic product contracted 2.0 percent year-on-year in the first quarter of this year, up from 1.9 percent fall in the fourth quarter of 2018 and a 0.2 percent decline in the third quarter of 2018 for a 2018 decline of 0.1 percent after a 0.9 percent fall in 2017.

Inflation in Nambia slowed to 3.9 percent in June from 4.1 percent in May and averaged 4.4 percent in the first half, with BON attributing the moderation to a decline in housing inflation.

BON forecast average inflation of 4.3 percent in 2019, down from its June forecast of 4.5 percent.

While average growth in private sector credit extension (PSCE) rose to 6.9 percent in the first half from 5.9 percent in the same 2018 period, BON said this was mainly due to higher uptake by credit in the retail, real estate, financial and mining sectors. But growth in credit to individuals "slowed somewhat" during the first half, BON added.

Together with the country's ministry of finance, BON revised the country's loan-to-value (LTV) ratios, with the new maximum LTV for the first, non-primary residence raised to 90 percent from a previous 80 percent. The ratios for second, third and fourth residences were also raised.

"At these adjusted levels, the Bank believes that LTVs will continue to shield the financial system from undue risks going forward," BON said.

BON began implementing the macroeconomic tool of LTVs in 2017 to mitigate the impact of an overheating housing market on the financial system.

Since then, BON said, there have been developments that warranted a review of this policy, including a significant slowdown in the economy and a sharp correction in the housing market.

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